January was
excellent, February not so much.And
March was, shall we say, “unsettled”.The
year started out strong, with gains across the board.But February saw a pullback that pushed the averages into negative
territory, and the rebound in March was short lived.

Everyone said the
correction was “overdue”, but no one was saying that before the event.And it doesn’t soften the blow to just say that the market “needed to
pull back”, or that the market had “gotten ahead of itself”.You get comfortable with your gains and you do not like to see them
evaporate.

I have commented
before on oil prices, when they were rising and of concern, and it is only
fitting that I revisit the subject in light of the current volatility.I wrote earlier that oil prices would rise as long as the government was
filling the Strategic Petroleum Reserve.The
fall from the mid-70’s to the upper 50’s can be laid to the ending of that
program.

Then, in the
President’s January State of the Union address, he called for a doubling of
the SPR.Are you surprised that oil
has rallied from that date on?Even
if the program has not yet begun, the market recognizes the potential demand and
sets prices accordingly.When the
government stops sopping up every extra barrel available, oil will find it’s
true supply-and-demand level.

Doubtless the
continuing problems in the Middle East have exacerbated the situation.When we invaded Iraq four years ago, oil hovered in the $30 per barrel
range; as I write this, it is trading at $66.Higher levels will start to affect the economy.

The buzz this
past quarter has been primarily about problems in housing and sub-prime mortgage
lending.Homebuilders, banks and
other lenders actively sought out questionable borrowers, packaged those loans,
and sold them to willing buyers.They
are now finding those loans coming back to haunt them.Foreclosures are sharply higher and real estate prices are softening.The fear is that the problem spills over into the prime area, and further
that it affects all of the industries ancillary to homebuilding.

My personal
feeling is that the market always looks for something to be nervous about, and
that this will eventually fade into history just as other seemingly catastrophic
situations have.I’m more concerned about oil prices than about sub-prime
lending.

“Don’t fight
the Fed” is an old market axiom.But
it has been nearly three years now since the Fed began raising rates, and today
the 10-year Treasury yields less than it did when the Fed began tightening.This shows that even if the Fed changes course, it is the market that
will ultimately dictate rates.

I believe that
rates should go up, for several reasons, not just because it has been the desire
of the Fed.If rates do go up, bonds will go down, so to remain true to
my belief, I am avoiding buying longer bonds.Keynes said, “Markets can remain irrational longer than you can remain
solvent”, but I still find it impossible to go against my instinct.

Thus I have a
problem:Over the next twelve
months or so bonds will be called faster than I can find good places to deploy
the money.So I ask your patience
in the fixed-income area, as you will see cash levels building up.It is my feeling that we have entered a long-term bear market for bonds,
and my direction will be toward shorter maturities and higher quality.However, barring some dramatic change, we will have to get
used to lower yields.At the
moment, money markets are as good a vehicle as any.

As for equities,
it looks like stocks will remain unsettled for the next couple of
quarters. While cautious, I have not turned negative and am looking to be
a buyer on the dips. Long-term
participants know that market pullbacks are very often buying opportunities.While we cannot know in advance the depth of a pullback, or it’s duration, we can
show that historically they have been relatively short-term events.Stay diversified, buy reasonable valuations, watch the balance sheets,
look for growth, and time will heal all wounds. I will, as always, apply
my conservative precepts to all purchases, stocks and bonds, and will continue
to do my utmost to protect and preserve our capital and to make it grow.